Risk Management in Trade with Central European Countries

Lo, Henry Y., Management International Review

Introduction

The Central European (CE) countries have one after another declared their freedom from communist regimes and announced their commitment to convert from state-controlled to market economies. Poland, Hungary, and the former Czechoslovakia (now the Czech Republic and Slovakia) were the first to take action to rejoin the global economy.

Entrepreneurs from the Republic of China (ROC) or Taiwan, among others, are discovering that Taiwan and the CE countries have supply and demand needs which complement one another. The CE countries can supply machinery and raw materials in demand in the ROC, while consumer non-durable goods from Taiwan can satisfy domestic demand in Central Europe. The optimism so far, however, has produced little fruit and the slow progress of economic reforms makes it too risky to take serious action.

It appears that the ASEAN countries (Indonesia, Malaysia, the Philippines and Thailand) and the People's Republic of China (PRC) or mainland China have a far greater comparative advantage in the eyes of Taiwan entrepreneurs seeking direct investment locations. There is a seeming dichotomy of direct commercial transactions in that Taiwan entrepreneurs prefer to trade with the CE countries while investing in other areas.

This article looks into Taiwan's economic activities in the international arena centering on the newly developed commercial relationship with the CE countries. As newcomers to the CE market, puzzled by its economic and political mechanisms and lacking market information, Taiwanese entrepreneurs have to approach it prudently and cautiously, fearing policy instability, the possibility of austerity measures, non-payment, etc.

A regular risk management process begins with identifying and measuring exposures to loss. This article assumes that political risk and credit risk have already been identified (Dickie 1991, Holman et al. 1990, Kralijic 1990). Taiwanese entrepreneurs cannot afford the risk alone nor can they avoid it, as it is obvious. The next section examines the reasons why Taiwanese entrepreneurs hesitate to invest in the CE market, given that their own investment climate has deteriorated. The third section focuses on trade relations between the CE market and Taiwan, and a number of risk management strategies are introduced. In the last section some conclusions are drawn.

The Investment Alternatives

Central Europe is by no standards a large market at present, though its potential cannot be overlooked. Whether that potential will materialise depends greatly on the smooth implementation of its unprecedented structural changes. Otherwise, despite their potential, these countries will be in danger of getting "stuck in the middle" and losing touch with both economic systems (Kralijic 1990).

Current Developments in Central Europe

Tuller (1992) reports that the process of restructuring in Central Europe remains in the first stage, that of creating a healthy atmosphere that requires establishing stable banking and trade credit system to provide the appropriate economic and entrepreneurial conditions for further progress. It is unrealistic to suppose that a mere injection of foreign capital or the provision of a bankable guarantee would cause the CE economies to prosper, unless they pass beyond transition shock and are effectively decontrolled (Rosefielde and Mills 1990), which would involve a long and complex process of evolution. Perhaps, to put right fears of misinvestment in industry and infrastructure would help the transition to a market economy (Lindsay 1990). Despite these difficulties, the ROC would like to take part in developing the CE region and establish bridgeheads for effective development.

Investment Climate in Taiwan

Taiwan's manufacturing industries depend heavily on exports, with many of them exporting up to 90% of their total production. Major exports are labour-intensive and price competitive in nature, a situation comfortably nurtured in the early period of Taiwan's economic development. …

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